Monday, July 02, 2007

The Analyst: Five Questions about Activist Investing with Eric Jackson

I was recently asked to answer "Five Questions" for the Indian magazine "The Analyst" published by The Institute for Chartered Financial Analysts of India University Press. The article will come out shortly on "Activist Investing." The questions and my answers are listed below:

1. How do you view the emergence of activist investors?

I think it's an extremely healthy trend which benefits all the capital markets. Friedrich Nietzche had a famous quotation that: "If you see an old tree falling over, you push it." Joseph Schumpeter built on this philosophy in his writings on "creative destruction" in capitalism and how consumers benefit from innovation that destabilizes monopolies or inefficiently run companies through new competition. In the case of activist investors, a public company with a number of assets faces its strongest critics from its shareholder base. Instead of waiting for competitors to force change, activist shareholders force change from within the family. Change from within is often very difficult, as managers and boards are committed to decisions they've taken in the past. Activist investors provide a very helpful and constructive objectivity to the company and its other shareholders, when they push for change to further increase a company's value.

2. How willing are the corporates in allowing the activists into boardrooms?

It's human nature to deflect criticism and defend your past actions. Who you are and how successful your past actions have been will be a determinant on how easily your views are accepted by boards and companies you target as an activist investor. That being said, however, there is increasing pressure on boards to demonstrate that they are fairly reviewing and are perceived as open to listening to the views of their shareholders. Despite representing a group of shareholders owning only 0.2% of Yahoo!, the company did agree to meet with me in advance of the annual meeting to discuss our alternative "Plan B." I'm not sure that would have happened 10 years ago. At the end of the day, the three single biggest predictors of you getting access to the boardroom are (1) how large a stake in the company you own, (2) the merits of your ideas and whether they have potential to gain traction with other shareholders, and (3) whether you seem to the board to be someone reasonable and fair with whom to negotiate.

3. What is its impact on corporate world?

There are some who say that activist investors can be short-sighted and distract management from their "real jobs" of running the business. As in any line of work, you can have activist investors who are more helpful and others who are less helpful. However, if management and boards have to be more vigilant and prepared to justify their actions to their shareholders as a result of concern or fear that they will become a target for activist investors, I believe that's a good thing which helps them make better decisions which - ultimately - better serve their shareholders.

4. Do you think activists overstep while forcing/ questioning corporate?

I personally cringe when I read reports of 20-something year old recent graduates who now work for hedge funds and make arrogant threats to managers. I believe you should fundamentally approach any potential activist investing target with humilty. These are companies led by managers who think about this industry and the company's situation 24 hours a day. Before you advocate change, you had better have done your homework and really have some well thought-out ideas for change. The other place where I believe activist investors sometimes fall down is in over-analyzing/placing weight on financial metrics, rather than governance, strategy, and operations. When you exclusively focus on the financials and advocate only a quick sale, dividend, or buyback, no wonder that you come under criticism for being too short-term focused. Financials are important as an activist investor. However, I personally believe that it's the governance, strategic, and operational problems that can hold the keys to the largest long-term return for shareholders.

5. Any other comments.

Activist investing does not have to be restricted to a handful of hedge fund managers who live in Greenwich, CT. Our work at Yahoo! demonstrates that individual investors can also play an important role in influencing dialogue and forcing change at companies. I hope that the Securities and Exchange Commission in the US allows for greater "proxy access" in time for the 2008 proxy season. Although few will take advantage of new rules making it easier to run for a spot on the boards of corporations, by making it possible, the SEC will be indirectly influencing companies to be better stewards for their shareholders - making a more robust and efficient capital market. I also hope that our Yahoo! example inspires more individual investors to see that, by using the free tools available to all on the Internet, they can be empowered to effect change. When shareholders speak, everyone benefits.

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